Way Forward For Juniors R Schodde AusImm 7 July 2009

The Junior Exploration sector is currently facing difficult times. The presentation details how the Australian industry responded in the last downturn - and identifies survival and growth strategies for junior companies

Transcript

1. The way forward for the Junior Sector in difficult times A Case of When the Going Gets Tough?Richard Schodde: MinEx ConsultingAusIMM Technical MeetingMelbourne, 7th July 2009MinEx Consulting Strategic advice on mineral economics & exploration

2. Overview Review how the Australian junior explorers responded to thebust in the late 1990s Who disappeared and how did it happen? Who were the winners and losers? Using data from the published reports identify the spendingand cash raising patterns of the Juniors over the businesscycle. From this make projections on: Likely future level of spending and where its going How many companies are under stress and who might disappear Comments on how the industry can rise to the challenge MinEx ConsultingStrategic advice on mineral economics & exploration 2 3. December 1998 versus December 2008 In December 1998 there were 215 junior mineral explorers listed on the ASX . By December 2008 this had grown to 554 companies . But 425 of these are new entrants, with only 154 of theoriginal 215 companies lasting the distanceQuestion - What happened to these companies, and what lessons can we learn from them?MinEx Consulting Strategic advice on mineral economics & exploration 3 4. In recent years a large number of Junior Explorers have entered the marketNumber of Additions/Deletions in Quarter 5040 Deletions 30New IPOs 2010 0Caution No data on Deletions prior to June 1998-10Dec-92Dec-94Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06Dec-08 Note: Data excludes IPOs for ProducersSource: MinEx Consulting based on ASX data MinEx ConsultingStrategic advice on mineral economics & exploration4 5. The industry has gone through a major boom-bustLevel of exploration in Australia: 1992-2008 Total Expenditures (2008 A$M) Total metres drilled (Million)2007 Expenditures1997 down 50% frompeak in 1997Note: Data reported on an annualised basis Source: ABS 8412.0, December 2008 MinEx Consulting Strategic advice on mineral economics & exploration5 6. But the situation wasnt as bleak as it first appears Of the 215 Junior Explorers that were around inDec 1998, only 28% of them disappeared Of the 61 Junior explorers that disappeared, themain factors were: These are what 46% were taken-over investors want !25% were promoted to Producer statusIe 16 out 215 Junior Explorersultimately became Producers.2% relocated overseas This gives a conversion rate of 7% 10% went bankrupt 19% turned into Dot-Com companies MinEx ConsultingStrategic advice on mineral economics & exploration 6 7. And much of this didnt happen overnight In December 1998 the average age of the juniorexplorers was 5.6 years. Those that ultimatelydisappeared, lived on for another 6 years . Giving a total average life expectancy of 12 yearsThis is comparable the average life expectancy of a dog (8 to 15 years)In 2007 the median period between marriage and divorce in Australia is currently only 12.5 years Source: ABS 3307.0.55.001, 2008 MinEx Consulting Strategic advice on mineral economics & exploration7 8. Winners and losers in the last downturn Winners Those companies who used new approaches to exploration to find the elephants: Minotaur (Prominent Hill), BeMaX (Mineral Sands), Moto (gold in the DRC) Those companies who had the vision to take strong positions on big company discards: Oxiana (Cu/Au at Sepon) and Indophil (Cu/Au at Tampakan) Companies that had the vision to be first into a neglected commodity Fortesque (Iron Ore), Paladin (U3O8) Losers Dot-Com companies Those companies that went to sleep and missed the subsequent boom MinEx Consulting Strategic advice on mineral economics & exploration 8 9. The key challenge facing junior explorers Because most junior companies are still at theexploration stage they need to continually raisemoney to fund their programs Lower commodity prices makes it harder to get a projectinto production or sell the project The Global Financial Crisis has made it harder forexploration companies to replenish their funds MinEx Consulting Strategic advice on mineral economics & exploration 9 10. ANALYSIS How did companies survive the last downturn? Using data published by the Juniors in their quarterlyreports to the ASX it is possible to determine longterm trends in the: Level of cash available Typical rates of expenditure (and where it goes) Average life expectancy of a company if no further fundingbecomes available The analysis was used to make observations on how the industry survivedthe last down turn and develop strategies for companies going-forward MinEx ConsultingStrategic advice on mineral economics & exploration 10 11. Snapshot of cash position of Australian Juniorexploration companies: end-March 2009 A$ MillionAverage cashMedian cash positionposition is $9.1m is $2.10m (ie half of the companies areabove/below this figure)Quartile 3Quartile 1 Source: Derived from Company quarterly Note: Survey based on random sample of 256 junior explorers listed on the ASX reports lodged with the ASX of which 168 were active end-March 2009 out of a total of ~550 companiesMinEx Consulting Strategic advice on mineral economics & exploration 12 12. Change in cash position: 1998-2008Sample of Australian Junior Exploration CompaniesA$ Million per company Even in tough times it is possible to raise money $2.10m $0.62mNote: Survey based on random sample of 256 junior explorerslisted on the ASX between December 1998 and March 2009 MinEx Consulting Strategic advice on mineral economics & exploration13 13. Change in expenditures: 1998-2008Sample of Australian Junior Exploration CompaniesA$ Million per company Company expenditures have been halved in the last six months$3.38m $1.34m $1.49mNote: Expenditures are reported on an annualised basisSource: MinEx ConsultingMinEx Consulting Strategic advice on mineral economics & exploration 14 14. Cash burn rate for Australian Juniors(Years) Annualised cashflow divided by cash reservesYearsMedian life expectancyremains at 1 year 1.140.60Without additional funding, a quarter of the industry will go out business within 6Source: MinEx Consultingmonths but thats nothing new !!MinEx Consulting Strategic advice on mineral economics & exploration 15 15. Sources of Cash by Junior ExplorersBreakdown of total cash incomeBreakdown (%)AVERAGE NUMBERSMost cash is raised from shareissues after the initial IPOCaution: Numbers are based on total cash raised for the entire survey group, and so the overall percentage split by activity is influenced by the actions of the larger companies Source: MinEx ConsultingMinEx ConsultingStrategic advice on mineral economics & exploration16 16. Uses of Cash by Junior ExplorersBreakdown of total cash expenditures Breakdown (%)AVERAGE NUMBERSMost cash is spent on exploration anddevelopment Caution: Numbers are based on total cash expenditures for the entire survey group, and so the overall percentage split by activity is influenced by the actions of the larger companies Source: MinEx ConsultingMinEx ConsultingStrategic advice on mineral economics & exploration17 17. One possible industry response What bears do in hibernationWhat do directors of speculative companies do duringbear markets? Its rather like asking what Collingwoodsupporters do during the cricket season or whatsoldiers do when peace breaks out. In the case of Blue Sky Mines, the Directors havesensibly contracted the companys activities so that ithas been running purely on administrative costs for thepast six months. A shareholder at the Annual Meetinglast year described us coarsely as management fee-bludgers and was expelled from the proceedings. Pierpont Source: The Official History of Blue Sky Minesby Trevor Sykes 1996MinEx ConsultingStrategic advice on mineral economics & exploration19 18. Where is the money being spent? Expenditures on Exploration + Development versus AdministrationA$ Million pa for the Median CompanyMoney into the ground has been sacrificed $2.48m $0.91m$0.79m $0.68m $0.42mCurrently half of theNote: Refers to Median CompanyJuniors funds are spentExpenditures are reported on an annualised basison admin/overheadsMinEx Consulting Strategic advice on mineral economics & exploration20 19. Five key tips to Survival1. Work hard on developing a loyal shareholder base- Frequent communication. Send hard copies of your Annual Report2. Raise money when you can- But need to pin it to a good story- Keep the project ideas coming forward3. Keep head office costs to a minimum- Share costs with like-minded Juniors4. Incentivise your staff - Reward them well and give stock options5. When spending money on drilling, make sure its well spent by camping out with the drilling crews - Spend time developing good relations with the local community Source: Rob Annells, Executive Chairman of Lakes Oil, as quoted by the Garimpero, Age 13 Oct 2008MinEx ConsultingStrategic advice on mineral economics & exploration 21 20. SUMMARY The Industry faces tough times The industry is midway through the down cycle If the last downturn is any guide, expect expenditures todrop by half from the 2008 peak Without fresh funding, a quarter of the industry willclose down within 6 months and half of the industrywithin a year but the real story is not that bleakMinEx Consulting Strategic advice on mineral economics & exploration 22 21. But history shows that the Industry ismade of tougher stuff Junior Explorers have always operated with limited cashreserves and short time horizons It has faced similar challenges in the past and survived However some companies will still fail. My guess is at most 20% of the juniors could disappear within12 months The down turn also impact the service providers Drilling activities and analytical activities may drop by half State Government drill funding programs will soften this blowMinEx ConsultingStrategic advice on mineral economics & exploration 23 22. Looking forwardtake advantage of the opportunities The current climate creates great opportunities foracquisitions and consolidation History shows that great companies are born in adversity Need to focus on whats important - success comes to thosewith a strong vision to find quality assets. Nows the time to hire that gun geologist, look in the greenfields forthe next giant deposit, buy the next Sepon, or take a key landposition in a neglected commodity / country MinEx Consulting Strategic advice on mineral economics & exploration24 23. CONCLUSIONS The key to survival hinges on the Juniors ability to raise freshmoney from its existing shareholders To earn the shareholders trust, companies need to continuecommunicating their vision/strategy . Most importantly,companies need to deliver good exploration results The risk is that, in the race to conserve cash companies arecutting back on the expenditures in the field. You cant makediscoveries if you dont drill holes !The industry will rise to the challenge !! MinEx ConsultingStrategic advice on mineral economics & exploration 25